Avantax Inc (AVTA) 2004 Q2 法說會逐字稿

Good day everyone and welcome the InfoSpace Q2 earnings release conference call. Todays call is being recorded. At this time for opening remarks and introductions I would like the turn the call over to Ms. Nancy Bacchieri, Vice President of Investor Relations for InfoSpace. Please go ahead.

Thank you Michael. Good afternoon and welcome to InfoSpace's second quarter 2004 earnings conference call. I'm Ms. Nancy Bacchieri, Vice President of Communications and Investor Relations for InfoSpace.

With me on the call today is James Voelker, Chairman and CEO and David Rostov, Chief Financial Officer. Before we get started I'd like the remind you of two things. First this is and investor conference call. Accordingingly we will only take questions from investment community. This conference call contains forward-looking statements relating to the development of the company's products and services, the acquisitions of Switchboard and Atlas Mobil and anticipated and future operating results. These statements are subjet to certain risks and uncertainties risks that could cause actual results to differ materially from those projected.

Factors that could affect the company's actual result of operations include but are not limited to, the progress and cost related to the development of our products and services, the timing of market acceptance of those products and services, our dependence on companies to distribute our products and services, the performance of our systems, the effectiveness of the development and implementations of our strategy, possible changes to that strategy, the ability to retain key contracts and personal and the ability to successfully integrate acquired businesses. A more detailed description of certain factors that could effect actual results of operations is contained in the company's quarterly report on form10Q, filed with the Securities and Exchange Commission in the section entitled, factors affecting our operating results, business prospects and market price of stock. Listeners are cautioned no to rely on these forward-looking statements which speak to the company's prospects only as of the date of this conference call. The company undertakes no obligation to update publicly any forward-looking statements due to new information, events or circumstances after date of this conference call or to reflect the occurrence of unanticipated events. Now I'll turn the call over to Jim, following his comments, David will review the Q2 financial results and then we'll open up the call to your questions.

Thank you, Nancy, and welcome the call today. I'm please to report another very strong quarter at InfoSpace. Revenue was 54.4 million, up 72% over the second quarter of 2003. We delivered strong sequential revenue and cash flow growth, and our fourth consecutive quarter of positive net income.

We entered the quarter with a strong balance sheet. Reporting approximately 293 million in cash. As a result of our overall performance and our confidence in our business prospects, we are increasing guidance for full year 2004. In the second quarter the major growth drivers were search distribution, online directory and increasingly in our mobile efforts. Search and directory posted a strong quarter, growing revenue of 61% over the same period last year. Sequentially, quarter over quarter growth -- revenues were up and margins remained solid at over 40%. Our distribution business continues to drive growth as revenue quadrupled since second quarter '03. In second quarter '04, we added new distribution partners and saw revenue growth in our existing base as well.

Our Metasearch technology and economic value proposition are the key drew for partners who want to monetize traffic and enjoy benefits of a full service private label branding solution. As search has become one of the key online activities, more and more high traffic websites understand the value of their own branded search offering. We're focused on growing our directory business and expanding our strategic partnerships. To that end we required leading online directory provider, Switchboard, at the beginning of June, nearly doubling our traffic and establishing InfoSpaces' strong position in the market.

14 billion in ad dollars are currently spent every year on off-line Yellow Page advertising, mainly by local advertisers. Less than 5% of those dollars have moved online, yet 20% of lookups have migrated. As broadband penetration Increase -- increases, providing constant ready access to the internet and local merchants become educated about the ROI value of a paper click model, we anticipate signifigant growth opportunities in this area. The Switchboard acquisition also provides a proven technology platform and important new partner relationships with AOL, Yellow Pages and Bell South. Recently, we signed an agreement with Dex Media which will add Yellow Page listing from Dex's 14 state region to Switchboard's substantial local listings and give Dex's advertisers access to the millions of users who visit Switchboard each month. We expected our ability to deliver high monetorization rates in both our distribution business and through online Yellow Page searches, will fuel continued growth in our search and directory segment. Now the mobile results. Our mobile unit posted very strong results in the second quarter, with revenue nearly tripling over the second quarter of '03 and up 35% sequentially. Our mobile business is demonstrating this exceptional growth via media downloads, where revenues increased by over 50% from first quarter. This growth is being driven by the increasing adoption of download capable phones and the fast acceptance of services by consumers. By year-end, approximately 60 million hand sets in the North American market will be download capable. And consumers are downloading media at an accelerating rate.

In one year, the number of active mobile media users almost tripled, putting the number of current users in the U.S. at more than 14 million. While these numbers are impressive, they really serve to illustrate the growth potential, as there are more than 150 million users in U.S. As a leader in graphics and ring tones, and now in the mobil game space through our acquisition of Atlas Mobile, we're well positioned for further growth. Atlas gives us a competitive position in burgeoning games market as provider of multi-player tournament style games, such as Tetris for prizes, holding poker for prices and Solitare for prizes. The acquisition also provides us with established gaming distribution relationships with Verizon Wireless, All Tel, Midwest Wireless, U.S. Cellular and Western Wireless. We see an important growth opportunity in mobil gaming.

According to industry analysts, U.S. mobil gaming revenues were 150 million in 2003 and that number is projected to double this year. In 2006, mobile gaming is projected to be a $1 billion industry in the United States and european market is larger. Valued at 800 million in 2003, and projected to reach over 5 billion by 2006. We're excited to expand our role in this vital space and intend to leverage our distribution network and the Atlas gaming platform to add new games and products to portfolio as well to as leverage our carrier relationships. In addition, we expanded our relationship with Verizon Wireless by providing the infrastructure and subscription management for their mobil web 2.0 portal. Our technology and service platform allows Verizon to offer a more flexible interface with expanded information and personalization capabilities. The mobile media market is nation industry. We're encouraged by the adoption of high capability hand sets and anticipate continued grow in our mobil content business as penetration grows. Through our technology services platform and our extensive product library, we believe that we are in a leading position to capitalize on this growth. To summarize we had a strong second quarter following a strong first quarter and we are confident about the future. Our continued strong performance reflects positive consumer trends as well as ain't to execute. We're well positioned in growing markets. Our continued strong financial performance reflects positive consumer trends, as well as our ability to execute. For second half of the year we expect to see growth in our search distribution, directory and media downloads business.

Looking forward we plan to expand our traffic base, enhance our product offerings and extend our customer relationships. With our strong balance sheet, proven technology and extensive partner relationships, we're well positioned to grow. And as the convergence of online access and mobile paves the way for an optimized mobil environment, with a full range of online capabilities, InfoSpace will be pivotal in providing companies and consumers the capabilities they need to succeed. With that I'll hand the call over to David and provide you with more detail on our financial results and outlook. David?

Thank you Jim, and thanks for joining us on the call today. As you can see this is a very positive quarter for InfoSpace. We had strong revenue growth, record operating income and our fourth consecutive quarter of positive net income. The results demonstrate that the restructuring and re-focus of the company that we initiated in 2003 have positioned InfoSpace as a strong and growing business. Our revenues for the second quarter were $54.4 million an increase of $22.8 million or 72% from second quarter 2003. Driven by strong growth in both businesses operating income was $12.3 million versus a loss of $9 million in the prior year second quarter. During the quarter, we recorded a gain from restructuring and other charges of $3.7 million, primarily due to settlement of outstanding litigation matter. We had our fourth consecutive quarter of positive net income generating $13.4 million of income from continuing operations for the quarter, versus a loss of $16 million in the prior year second quarter. Earnings per share from continuing operations for the second quarter of '04 was positive 37 cents per diluted share versus loss of 51 cents per share for the prior year second quarter. GAAP net income for the second quarter was $13.5 million or 37 cents per diluted share versus a net loss of $16.5 million or loss of 53 cents per diluted share in the second quarter of '03. Weighted average of fully diluted shares was 36.2 million for the second quarter of 2004.

And as of June 30 we had approximately 425 employees. Now let me turn to our segments, starting with search and directory. In second quarter of '04 search and directory revenues were $34.4 million up $13 million or 61% from the second quarter of '03. Included in the second quarter '04 revenue was over one million dollars from Switchboard. Our search and directory business in North America, which included Switchboard, starting June 3, generated approximately 178 million paid searches during the quarter, up 3% sequentially and up 31% year-over-year. Average revenue per page search was 16 cents in line with the first quarter of '04 and up 23% from the second quarter of '03. Segment income was $14.6 million up $800,000 or 6% from of the first quarter of '04. Search and directory segment margin increased sequentially from 41.5% to 42.5%. In the second quarter we saw the benefits of continued growth in search distribution business combined with growth and directory. This was partially offset by the impact of seasonalty in our search business.

In the second quarter search distribution revenues in in North America accounted for over 60% of the portion of search and directory revenue coming from search. Now turning to the mobile business. Revenues for the second quarter were $20.1 million and increase of $13.2 million or 192% from the second quarter of 2003. And a 35% increase sequentially. The increase in revenue is a result of strong growth in mobile media downloads. Mobile segment income totaled $6.5 million for quarter. A sequential increase of $2.8 million or 73% from first quarter and the segment margin was 32.6% up from 25.5% in the first quarter of '04. In the quarter we had the benefit of stable pricing for our services combined with strong volume growth.

Regarding the balance sheet. The company ended quarter with approximately $293 million in cash and marketable investments. During the second quarter we purchased Switchboard for a net cash cost of approximately $109 million, including transaction costs. Excluding the Switchboard acquisition our cash balance increased by $22 million from end of first quarter. Now let me turn to our outlook. I'll start with third quarter outlook. For the third quarter of 2004 we expect revenue to be between 60 and $64 million, excluding any one time gains or losses for the third quarter, we expect to generate income from continuing operations of eight to $10 million and fully diluted earnings per share of 22 cents to 27 cents. This assumes 37 million fully diluted shares in the third quarter.

We believe media that downloads, inparticular ring tones, will continue to grow at a strong pace for rest of this year. For second half of '04 we are raising our guidance for mobil margins from 20 to 25% to 25 to 30%. This is a signifigant increase our margin outlook, driven large part by benefits of scale. It is lower than the second quarter margins due to following. First, we continue to belief that we will see price pressure in our services business in the second half of '04. Second, strong growth in MP3 quality ring tones will put some on margin since these ring tones have a lower average gross margin than some of our other download products. Third it is our intent to continue to invest in being a market leader in this industry. Therefore we expect to invest a portion of our incremental segment income into future product development. Mobile games are a good example of this. On the search and directory side we continue to expect segment margins to remain at or above 40%. We expect that our depreciation and amortization expense will increase by 2 million in third quarter, mainly as a result of the non-cash amortization of intangibles from the two recent acquisitions we completed. Keep in mind that when comparing our third quarter guidance to our second quarter '04 income from continuing operations, second quarter includes the $3.7 million or 10 cent per diluted share gain from restructuring and other and third quarter will include the increase of $2 million in depreciation amortization expense from our recent acquisitions.

For the full year 2004 based on the strength of our business in the the first half of year we are raising our guidance. We expect total revenues to be between 227 and $237 million. This represents an increase of $20 million relative to our prior guidance. Of this amount we expect search and directory including Switchboard to be between 147 and $152 million, and mobile revenues to be between 80 and $85 million. We expect income from continuing operations for the full year 2004 to be between 36 and $40 million, an increase of $13 million from prior guidance. We expect fully diluted earnings per share to be between 97 cents and $1.08. This assumes 37 million fully diluted shares. This concludes our prepared remarks I will now turn the call over the the operator and we'll be happy to take questions.

If you would like to ask a question at this time, please signal us by pressing the star key, followed by the digit one on your touch-tone telephone. If you are using a speaker phone, please be sure your mute function is turned off, to allow your signal to reach our equipment. Once again, please press star 1 to ask a question at this time. And we'll take our first question from Safa Rashtchy with Piper Jaffray.

Hi, Piper Jeffray from Safa Raschtcy. Now that you have the the Switchboard in house for a couple of months, what have you found your ability to monitor traffic and what are expectations for second half of the year?

Obviously we closed the deal in early part of June so we've had, you know, just a couple of weeks now with the business. We announced, I guess it's been probably about 2 or 3 weeks ago, that we signed a deal with Dex to expand our coverage to another part of the country -- or with another key player that we didn't have in that space. And, you know, we feel like we're on track relative to the original guidance we provided a couple of months ago as it related to Switchboard and as it related to our directory business as a whole.

One quick follow-up,here. In the wireless segment, are there any new services that you're offering signifigant growth or growth in an over-all market and how is our growth compared to over all market here?

On the question of new services, I mean, we're often adding new and incremental services and the example the most recent example is the addition of Verizon services that we added late in the quarter. But, really, the main driver, as I indicated in the earnings call, earlier was by way of sheer volume of the mobile media downloads, you know ring tones, graphics are probably two biggest areas where we've seen signifigant increases.

This is Jim relative to second quarter and really in the first quarter as well, it's not been new services driving it. It's been, really, just adoption, you know, adoption and again, hand-set penetration out there. New hand sets get in the market and new users using services and, you know, the Verizon stuff just turned up in late June so we really haven't seen much impact of that. We think that'll be slow across the year impact, and then the gaming portion we'll see some impact of that probably 4th quarter and into next year.

Thank you and great quarter.

Thank you.

And we'll take our next question from Imran Kahn, JP Morgan.

Hi, Jim. How are you doing?

I'm doing fine. How are you doing, today, Imran?

I'm doing very well, thank you.

That's good.

Couple of questions, so now you have like 8 dollar cash and free cash flow part last six months was 40 cents per share (inaudible) what's the plan, like, what do you think that you can make the future acquisition? It seems like mobile area is working very well. Could you talk a little about that and then I have a follow-up question.

Well, you know, we continue to be interested in a number of things, really. On the online side we're very interested in expanding our traffic capabilities, you know, owning more traffic, particularly in directory side where we already have a nice piece of the market and we'd like to, you know, continue to strengthen our area there. On the mobile side, I think you saw what we did with games, so adding product types that -- particularly product types that have traction in the marketplace already -- would be interesting to us and also geography and distribution relationships would be very interesting to us. So those are the areas we are focused on and, you know, we're always working.

Okay. Can you give us color, like what the depreciation would look like for 2004?

Full year, well you take, you know, we're talking depreciation and amortization both.

35-40 million of operating income drying to back up to EBITA.

Yeah. Well, in second quarter if you add depreciation and amortization it was running about 3.7 million, which is roughly in line with where it was in the first quarter. And so I would encourage you to add two million to that number for both, not incremental, but so it'll be two million million higher in third quarter and then I expect that number to be the same for 4th quarter from 3rd quarter.

So closer to 18-20 million for depreciation and amortization.

Well you should take 5.7 times 2.

Okay.

Yeah, that's about right. 18-19 million.

Great, thanks. Good quarter.

And We'll take next question from Pete Speer with Delafield Hambrecht.

Hey, guys, nice quarter. Great job.

Thanks, Peter.

Can you just comment on -- you may have mentioned something about this but the margins, the second margins in search and directory from last year around 43% versus 55% what's driving that margin deterioration there?

As we talked about over the last few quarters, a year-ago our business, it's fair to say, was a very different business than it is today. And so, our growth in the business has come primarily from distribution where we've added other partners and we do the search for other peoples' web-sites. As an example, we do search for NASDAQ or ABC News, among others. And in that instance we share the economics with the partner. The good news is, you know, they drive customers to their site and they spend the marketing and we share the economics. So, we've seen very healthy growth in our search business year-over-year and even more recently in the last few quarters, and that shifted the margins. Also, it's fair to say, you know, if you look at this search and directory business a year-plus ago, very little money or investment was being put into marketing or product enhancement, so, you know, we've done some of that as well. So, you know, we continue to try and enhance the product and try and, you know, invest in the future of these products.

Okay. Do you expect that to remain in low to mid 40s for this year.

And That's consistent with our view over the last few quarters and you should expect that margin to be at 40% or, you know, 40% or above 40% is the right range for the next few quarters.

Okay. And just one more question on that. Can you comment on any development with private label search and new alliance with partners there?

Well, you know, we continue to add new partners, you know, all the time, every week but we don't really have any releases right now on names. We see growth in two ways, though, Peter. I'll tell you this, just to give you a little insight. We see growth both from adding new partners every quarter and then from our existing partners growing their traffic.

Okay. Thanks very much.

Coming from two places. Thanks.

Great. Thank you.

And we'll take our next question is from Jeff Border with Wedbush Morgan.

Thank you few questions first I'm wondering can you break down revenue in the mobile section between downloads and other mobile services and also percentage of revenue between in search between distributors versus direct?

Sure I'll take a stab at that. On the mobile side we don't pleak out those two numbers in large part they apply to same customers and we try to run the business or I shouldn't say we try, we run the business to maximize relationships and revenue rage relationships across various progunt lines as Jim mentioned a helpful tis tech for you on the media download side revenue increased sequentially first quarter to second quarter by over 50% so that will give you a feel for strength in that area. With regard to search side of the call. In this quarter distribution business as percent tam of business accounted for over 60% of revenues.

Secondly, curious about the recent announcement between mote row what and apple with I tunes deal do you see that afettinging business at all in terms of threats or opportunity or things like that.

Not really at all. I think it is interesting announcement but I think it will be a quite a long time before people really are able to to use phones as effective M P 3 players two limiting factors one the amount of memory and bigger one is the the battery power. So I think, interesting announcement but not necessary to hurt our business.) The other thing is we sell personally sation in terms of ring tones rather than music for listening what I find Iran I can about this market is despite P R about I tunes there are far far more ring tones every quarter than downloadable songs people pay one half to two time the rates for those ring tones so we're really in a different business.

Okay thank you very much.

Thank you.

We take next question from Michael Proeber with Clovis Capital.

Guys my questions been answered thank you.

Thank you.

Once again please press star one to ask a question at this time. Next question is Jason Avilio with Piper Jaffray.

Hi, guys nice quarter. Can you talk act the search business I saw search and directory marginings up about one hundred basis points sequentially but percent tam of revenue of third parties wondering if that was that was as a result of of Switchboard deal or are you signing better relation 147 on the disdistribution front. Secondly I know you said you raced mobile marks to to 25-30% where does in a trend over time.) You talked about pricing pressure and competitive dynamics in market place particularly with ring tone business is that a sus tane longer term operating margin or where do are you see that heading mabe not now but a year or two from now.

The second second part of you question is we have vids through the end of the year and maybe a few days beyond, but I guess my overall feeling on this is is volumes will continue to grow rapidly there will be scale in those volumes that will get past the carriers some of the value of that but at this point visibility in marks is where we say between 25-30% which to point you made is up about five basis points on average of what we were seeing a quarter as. On the second issue or I guess your first issue which was really the product mix you're right it has to do with all of those things increases in direct you side and yet, we have been talking all along seeing marks in the low 40s it has been the challenged a number of times about this and how this product mix would change that we said it would be in low 40s we said it will continue regardless of increases in the disdistribution so maybe that can tell you how those things are structured.

One quick follow up I heard you talk historically of initiatives to work on to regain share in terms of organtic appropriates do you have update there.

We continue to work on it we spent marketing dollars we're learning we've been able to I think you heard us say that we've been able to stem the tide there that is not all together satisfactory but better than a year-ago or ten months ago. We mound things that we see that drives traffic we are making product improvements to get better attention levels on that traffic we keep tinkering with this and working with it it we believe we'll have success.

Half of of is it to new product development initiative or half the marts or one of the two getting is disproportionate share.

I say it is a little bit of both. Keep in the things we talk at here we leverage towards growing distribution business business which is a key part of growing business strategy. It is not just we went we spend on that and that's it we are able to leverage that to improve products so we see a double benefit from that.

Again, congratulations on a great quarter.

Operator with that I think we are out of questions so we'd like the thank you everybody or joining us today and don't hesitate to calls with any follow up questions.

This does conclude todays conference call we thank you for you participation. You may now disconnect